Just six weeks ago, gasoline prices at the
US pump were hovering at the $3-per-gallon (79
cents a liter) mark; now they're inching toward $2
(53 cents a liter) - and some analysts predict
even lower numbers before the November elections.
The sharp drop in gasoline prices has been good
news for US consumers, who now have more money in
their pockets to spend on food and other
necessities - and for President George W Bush, who has

witnessed a sudden lift in
his approval ratings.

Is this the result
of some hidden conspiracy between the White House
and Big Oil to help the Republican cause in the
elections, as some are already suggesting? How
does a possible war with Iran fit into the
gasoline-price equation? And what do falling
gasoline prices tell us about "peak oil" theory,
which predicts that we have reached our energy
limits on the planet?

Since gasoline
prices began their sharp decline in mid-August,
many pundits have tried to account for the drop,
but none have offered a completely convincing
explanation, lending some plausibility to claims
that the Bush administration and its long-term
allies in the oil industry are manipulating prices
behind the scenes.

In my view, however,
the most significant factor in the downturn in
prices has simply been a sharp easing of the "fear
factor" - the worry that crude-oil prices would
rise to $100 or more a barrel because of spreading
war in the Middle East, a US strike at Iranian
nuclear facilities, and possible Katrina-scale
hurricanes blowing through the Gulf of Mexico,
severely damaging offshore oil rigs.

As
the summer commenced and oil prices began a steep
upward climb, many industry analysts were
predicting a late-summer or early-autumn clash
between the US and Iran (roughly coinciding with a
predicted intense hurricane season). This led oil
merchants and refiners to fill their storage
facilities to capacity with $70-$80-per-barrel
oil. They expected to have a considerable backlog
to sell at a substantial profit if supplies from
the Middle East were cut off and/or storms hit the
Gulf of Mexico.

Then came the war in
Lebanon. At first, the fighting seemed to confirm
such predictions, only increasing fears of a
regionwide conflict, possibly involving Iran. The
price of crude oil approached record heights. In
the early days of the war, the Bush administration
tacitly seconded Israeli actions in Lebanon,
which, it was widely assumed, would lay the
groundwork for a similar campaign against military
targets in Iran. But Hezbollah's success in
holding off the Israeli military combined with
horrific television images of civilian casualties
forced leaders in the US and Europe to intercede
and bring the fighting to a halt.

We may
never know exactly what led the White House to
shift course on Lebanon, but high oil prices - and
expectations of worse to come - were surely a
factor in administration calculations. When it
became clear that the Israelis were facing far
stiffer resistance than expected, and that the
Iranians were capable of fomenting all manner of
mischief (including, potentially, total havoc in
the global oil market), wiser heads in the
corporate wing of the Republican Party undoubtedly
concluded that any further escalation or
regionalization of the war would immediately push
crude-oil prices over $100 per barrel.

Prices at the gasoline pump would then
have been driven into the $4-$5-per-gallon range
($1-$1.30 per liter), virtually ensuring a
Republican defeat in the mid-term elections. This
was still early in the summer, of course, well
before peak hurricane season; mix just one
Katrina-strength storm in the Gulf of Mexico into
this already unfolding nightmare scenario and the
fate of the Republicans would have been sealed.

In any case, Bush did allow Secretary of
State Condoleezza Rice to work with the Europeans
to stop the Lebanon fighting and has since
refrained from any overt talk about a possible
assault on Iran. Careful never explicitly to rule
out the military option when it comes to Iran's
nuclear enrichment facilities, since June he has
nonetheless steadfastly insisted that diplomacy
must be given a chance to work. Meanwhile, we have
made it most of the way through this year's
hurricane season without a single catastrophic
storm hitting the US.

For all these
reasons, immediate fears about a clash with Iran,
a possible spreading of war to other oil regions
in the Middle East and Gulf of Mexico hurricanes
have dissipated, and the price of crude oil has
plummeted. On top of this, there appears to be a
perceptible slowing of the world economy -
precipitated, in part, by the rising prices of raw
materials - leading to a drop in oil demand. The
result? Retailers have abundant supplies of
gasoline on hand and the laws of supply and demand
dictate a decline in prices.

Finding
energy in difficult places How long will
this combination of factors prevail? Best guess:
the slowdown in global economic growth will
continue for a time, further lowering prices at
the pump. This is likely to help retailers in time
for the Christmas shopping season, projected to be
marginally better this year than last precisely
because of those lower gasoline prices.

Once the election season is past, however,
Bush will have less incentive to muzzle his
rhetoric on Iran and we may experience a sharp
increase in the bashing of Iranian President
Mahmud Ahmadinejad. If no progress has been made
by year's end on the diplomatic front, expect an
acceleration of the preparations for war already
under way in the Persian Gulf area (similar to the
military buildup witnessed in late 2002 and early
2003 prior to the US invasion of Iraq). This will
naturally lead to an intensification of fears and
a reversal of the downward spiral of gasoline
prices, though from a level that, by then, may be
well below $2 per gallon. Now that we've come
this far, does the recent drop in gasoline prices
and the seemingly sudden abundance of petroleum
reveal a flaw in the argument for this as a
peak-oil moment? The peak-oil theory, which had
been getting ever more attention until the price
at the pump began to fall, contends that the
amount of oil in the world is finite; that once
we've used up about half of the original global
supply, production will attain a maximum or "peak"
level, after which daily output will fall, no
matter how much more is spent on exploration and
enhanced extraction technology.

Most
industry analysts now agree that global oil output
will eventually reach a peak level, but there is
considerable debate as to exactly when that moment
will arise. Recently, a growing number of
specialists - many joined under the banner of the
Association for the Study of Peak Oil - are
claiming that we have already consumed about half
the world's original inheritance of 2 trillion
barrels of conventional (ie, liquid) petroleum,
and so are at, or very near, the peak-oil moment
and can expect an imminent contraction in
supplies.

In the autumn of 2005, as if in
confirmation of this assessment, the chief
executive officer of Chevron, David O'Reilly,
blanketed US newspapers and magazines with an
advertisement stating, "One thing is clear: the
era of easy oil is over ... Demand is soaring like
never before ... At the same time, many of the
world's oil and gas fields are maturing. And new
energy discoveries are mainly occurring in places
where resources are difficult to extract,
physically, economically and even politically.
When growing demand meets tighter supplies, the
result is more competition for the same
resources."

But this is not, of course,
what we are now seeing. Petroleum supplies are
more abundant than they were six months ago. There
have even been some promising discoveries of new
oil and gas fields in the Gulf of Mexico, while -
modestly adding to global stockpiles - several
foreign fields and pipelines have come online in
the past few months, including the $4 billion
Baku-Tbilisi-Ceyhan (BTC) pipeline from the
Caspian Sea to Turkey's Mediterranean coast, which
will bring new supplies to world markets. Does
this indicate that the peak-oil theory is headed
for the dustbin of history or, at least, that the
peak moment is still safely in our future?

As it happens, nothing in the current
situation should lead us to conclude that the
peak-oil theory is wrong. Far from it. As
suggested by Chevron's O'Reilly, remaining energy
supplies on the planet are mainly to be found "in
places where resources are difficult to extract,
physically, economically and even politically".
This is exactly what we are seeing today.

For example, the much-heralded new
discovery in the Gulf of Mexico, Chevron's Jack No
2 Well, lies beneath 8 kilometers of water and
rock some 280km south of New Orleans, Louisiana,
in an area where, in recent years, hurricanes
Ivan, Katrina and Rita have attained their maximum
strength and inflicted their greatest damage on
offshore oil facilities.

It is naive to
assume that, however promising Jack No 2 may seem
in oil-industry publicity releases, it will not be
exposed to Category 5 hurricanes in the years
ahead, especially as global warming heats the gulf
and generates ever more potent storms. Obviously,
Chevron would not be investing billions of dollars
in costly technology to develop such a precarious
energy resource if there were better opportunities
on land or closer to shore - but so many of those
easy-to-get-at places have now been exhausted that
the company has been left with little choice in
the matter.

Or take the equally ballyhooed
BTC pipeline, which shipped its first oil in July,
with top US officials in attendance. This conduit
stretches 1,675km from Baku in Azerbaijan to the
Turkish port of Ceyhan, passing no fewer than six
active or potential war zones along the way: the
Armenian enclave of Nagorno-Karabakh in
Azerbaijan; Chechnya and Dagestan in Russia; the
Muslim separatist enclaves of South Ossetia and
Abkhazia in Georgia; and the Kurdish regions of
Turkey. Is this where anyone in his right mind
would build a pipeline? Not unless one were
desperate for oil, and safer locations had already
been used up.

In fact, virtually all of
the other new fields being developed or considered
by US and foreign energy firms - the Arctic
National Wildlife Refuge in Alaska, the jungles of
Colombia, northern Siberia, Uganda, Chad, Sakhalin
Island in Russia's Far East - are in areas that
are hard to reach, environmentally sensitive, or
just plain dangerous. Most of these fields will be
developed, and they will yield additional supplies
of oil, but the fact that we are being forced to
rely on them suggests that the peak-oil moment has
indeed arrived and that the general direction of
the price of oil, despite periodic drops, will
tend to be upward as the cost of production in
these out-of-the-way and dangerous places
continues to climb.

Living on the
peak-oil plateau Some peak-oil theorists
have, however, done us all a disservice by
suggesting, for rhetorical purposes, that the
peak-oil moment is ... well, a sharp peak. They
paint a picture of a simple, steep, upward
production slope leading to a pinnacle, followed
by a similarly neat and steep decline. Perhaps
looking back from 500 years hence, this moment
will have that appearance on global oil-production
charts. But for those of us living now, the "peak"
is more likely to feel like a plateau - lasting
for perhaps a decade or more - in which global oil
production will experience occasional ups and
downs without rising substantially (as predicted
by those who dismiss peak-oil theory), nor falling
precipitously (as predicted by its most ardent
proponents).

During this interim period,
particular events - a hurricane, an outbreak of
conflict in an oil region - will temporarily
tighten supplies, raising fuel prices, while the
opening of a new field or pipeline, or simply (as
now) the alleviation of immediate fears and a
temporary boost in supplies, will lower prices.
Eventually, of course, we will reach the plateau's
end and the decline predicted by the theory will
commence in earnest.

In the meantime, for
better or worse, we live on that plateau today. If
this year's hurricane season ends with no major
storms, and we get through the next few months
without a major blowup in the Middle East,
Americans are likely to start 2007 with lower
gasoline prices than they've seen in a while.

This is not, however, evidence of a major
trend. Because global oil supplies are never
likely to be truly abundant again, it would only
take one major storm or one major crisis in the
Middle East to push crude-oil prices back up near
or over $80 a barrel. This is the world we now
inhabit, and it will never get truly better until
we develop an entirely new energy system based on
petroleum alternatives and renewable fuels.

Michael T Klare is a professor
of peace and world security studies at Hampshire
College in Amherst, Massachusetts and the author
of Blood and Oil: The Dangers and Consequences
of America's Growing Dependency on Imported
Petroleum.